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Modernized Dunkin' Donuts plans 10-plus area stores

August 21, 2006

When Dunkin' Donuts thinks Circle City, it sees a dollar sign and a jelly stick followed by lots of maple-frosted circles.

The Boston-area-based chain is salivating over the prospect of ringing up big sales in Indianapolis and wants to franchise at least 10 stores here within the next year as part of a national expansion.

Dunkin' has reinvented itself to take on Starbucks, rolling out concept stores with hip furniture and music and more emphasis on hot and cold beverages than on its gut-growing yeast and cake doughnuts.

Don't look for this Northeast institution to abandon its blue-collar appeal for pretentious Starbucks lingo such as "venti" and "grande." Its drinks will still come in small, medium and large sizes.

"Think about it as Starbucks for every man. It's more like Starbucks meets Target," said Dennis Lombardi, a vice president of Columbus, Ohio, restaurant consulting firm WD Partners.

Dunkin' Donuts might have to work hard to recapture Indianapolis customers, however.

Its local franchisees over the last several years shuttered their stores, which often were dumpy and their product line stale. One Dunkin' Donuts franchise near Indianapolis International Airport still sported 1960s-era laminate countertops and vinyl bar chairs.

"This is a redone, much more modern, design décor," said Steve Delaney, a partner at Indianapolis-based retail brokerage The Linder Co.

By seeking a minimum 10-store development by a franchisee in Indianapolis, the doughnut chain does more than improve its economics for advertising and marketing--it's also more likely to attract experienced franchisees, Lombardi said.

Officially, Dunkin' Donuts isn't saying much. A spokesman confirmed the firm is eyeing Indianapolis and hopes to make an announcement soon. According to its Web site, it is looking for franchisees with a minimum $2.4 million in financial resources. Those typically are companies that operate several chain restaurants in a region.

"[Dunkin' officials] have been approached by some pretty significant operators," said Eric Hillenbrand, second vice president of the local office of St. Louis-based Colliers Turley Martin Tucker. Hillenbrand is working with parent company Dunkin' Brands, but declined to identify the operators. He said Dunkin' is looking to franchise "a lot" of Indianapolis-area stores, likely with several franchisees.

Company officials recently told a Boston newspaper that Indianapolis; Cincinnati; Nashville, Tenn.; and Jacksonville, Fla., are its near-term expansion focus. The company seeks to have 15,000 stores by 2020 versus 5,000 U.S. stores today.

Last year, Dunkin' Brands' sales grew nearly 14 percent, to $3.9 billion, ranking it No. 10 in the top 100 restaurant chains tracked by Chicago-based food consulting firm Technomic Inc. By contrast, No. 6 Starbucks' sales rose 20.5 percent, to $5.8 billion.

Helping fuel growth for Dunkin' Brands are new owners that include Bain Capital and Thomas H. Lee Partners, two big Boston buyout firms. Their $2.4 billion purchase in March included ice cream chain Baskin-Robbins and sandwich chain Togo's.

Even before the buyout, Dunkin' Donuts was trying to find a new identity in a segment dominated by Seattle's Starbucks.

In 2003, Dunkin' Donuts added espresso to its mild-mannered coffee lineup. More recently, it introduced a smoothie drink, consisting of yogurt and appealing more to afternoon customers.

The new Dunkin' Donuts "is really not in the doughnut business; it's in the coffee business," said Christopher Muller, a professor at the Rosen College of Hospitality Management at the University of Central Florida in Orlando.

"Bob Rosenberg, the former CEO and son of the founder, regretted not keeping that thought in mind during the 1990s when Starbucks was making its first run. Current CEO Jon Luthor will not make that same mistake again," Muller added.

The frozen-drink genre is "really where the growth is in the beverage category," said David Henkes, a senior vice president at Technomic.

Dunkin' Donuts still has an advantage in its regular coffee, a more mild blend than Starbucks' that's about $1 cheaper, Muller said.

Meanwhile, the chain has been beefing up its food offerings with breakfast and lunch sandwiches.

"This gives them a competitive advantage over Starbucks, which has had trouble finding a food position," Muller said.

Expansions of national coffee and doughnut chains have not been without indigestion.

Krispy Kreme Doughnut Corp. rolled into town in the 1990s on a sugar high, intriguing consumers with its hot doughnuts they could watch being made behind a glass partition. In 2000, the Winston-Salem, N.C., company went public and its stock soared.

It later tanked, the victim of too much hype, a light-speed national expansion, heavy debt and franchisee issues. The company closed a number of stores, and today only one operates locally. Losses have been mounting, and the Securities and Exchange Commission has launched an investigation into company accounting.

An expansion by a national chain also can have other challenges--local bakeries. Mom-and-pops like Long's Bakery, Hart Bakery & Gifts and Taylor's Bakery enjoy a cult following. Hart, 7030 E. 10th St., is cranking out doughnuts made by the third generation of family members.

"Service and price and quality" have been the key to longevity, said Hart owner Sandy Taylor--no connection to Taylor's Bakery--who boasts that her doughnuts are made on-site rather than at a remote kitchen that feeds retail stores.

Old-school wisdom also prevails: If the forecast calls for rain, Taylor makes sure her crew makes more doughnuts; they tend to be in more demand on dreary days.

What if Dunkin' Donuts rolls into town? Taylor expects to lose a few customers, but "what they're doing is, they're really competing against Starbucks," she said.

One reason for her assessment is that her bakery doesn't offer much in the way of coffee--customers often go to the Shell gas station next store, where coffee is a loss leader.

"We tried flavored coffees, but that doesn't go," she said.

Even with numerous local bakeries and Starbucks' growing presence, Delaney's gut tells him "this segment is underserved ... . There is a void."

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